Buy-to-let: Five ways landlords can beat new tax hikes

Nov 6, 2015

The removal of mortgage interest tax relief, announced in the Budget and effective from 2017, will hit hundreds of thousands of property investors.

George Osborne wiped nearly 11pc off the gross returns from buy to let properties, leaving many landlords facing the prospect of an annual loss, when he slashed higher-rate relief on mortgages in the Budget.

The tax changes, which begin in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20pc on all mortgage interest.

Here’s what to do:

1. Remortgage
If a buy-to-let landlord is paying 5pc on a typical £120,000 mortgage, he might currently be earning rental income of £750 per month or £9,000 annually. After allowing for expenses, agents’ fees and mortgage interest he is left with a £612 annual profit after tax, according to L&C.
However, when tax relief is reduced to 20pc that profit turns into an annual loss of £588. By remortgaging at, say, 3.79pc with a five-year fixed-rate loan from Virgin Money, he can save £1,452 annually on his interest bill, turning that annual loss back into a profit of £574.
Without remortgaging, his bottom line will deteriorate further as interest rates rise. Should buy-to-let loan rates reach 7pc by the time that higher-rate tax relief has completely disappeared in 2020, he will be looking at an annual loss of £2,784.
So buy-to-let landlords are likely to increasingly seek to peg their losses by fixing their rates longer where possible. Unfortunately, whereas home buyers can borrow at 3pc fixed for 10 years, a comparable 10-year buy-to-let loan will cost nearly 2 percentage points more. One option is from the Mortgage Works at 4.99pc with a £995 fee.
Mr Hollingworth said: “Fixed-rate deals that last more than five years are extremely limited at the moment.”

2. Exploit your spouse’s personal allowance
Where you do make profits, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20pc tax band.

3. Become a company
The Government is cutting corporation tax to 19pc in 2017 and 18pc in 2020, just as the buy-to-let changes bite. One way for higher-rate taxpayers to cut their tax bills might be to invest via a company. This is not difficult, and can be arranged by your solicitor. But proceed with caution, as there can be complications.
The corporation tax rate isn’t the only advantage. All costs can be offset against rental income, so in theory profits may be further improved.
Paul Emery, a property tax partner at PwC, the accountancy firm, said: “If you have £10,000 in rent and £9,000 costs, then tax is only due on £1,000. However, under the personal buy to let regime, you could end up with a £4,000 tax bill. Buy-to-let is the only area where you can end up paying tax when you make a loss.”
However, income can only be paid out to the directors as a dividend. From next April they can each receive £5,000 annually tax free. After that, dividends paid to higher-rate taxpayers are reduced by 32.5pc, while basic-rate taxpayers pay a 7.5pc dividend tax.

4. Selling property and reducing loans
The changes should prompt landlords to reassess their holdings, with a view to selling up or paying off some of the loan. Ray Boulger of mortgage broker John Charcol said: “Some will take the changes on the chin, while others will wish to reorganise their arrangements.
“Where you have a portfolio, it may make sense to sell one property and reduce the borrowings on others.”

5. Raise rents
Many commentators believe rents will have to rise, although how easy that will be given recent sharp upward moves remains to be seen.